The apparent lack of policy co-ordination within the Indian government over Iran is really worrying.

We are referring to the RBI’s decisions in recent days closing the Asian Clearing Union (ACU) mechanism to imports—beginning with oil and extending to other goods and services—from Iran. The move not only caught the industry by surprise. And it looks like it caught the relevant government ministries by surprise as well. Given that Iran is India’s second largest supplier of crude oil accounting for around 13 percent ($12 billion) of oil imports and the risk of a short-term supply shock sending oil prices higher, the lack of policy coordination amounts to dereliction of duty.

The lack of coordination reflects a deeper malaise—the UPA government’s inability to evolve a coherent policy on Iran, with the result that New Delhi is forever in reactive mode. [See: Will the Ayatollah step behind the line?] The overall failure of Prime Minister Manmohan Singh and his government to communicate with the public—witness how they botched up the India-US nuclear deal—means that no political leader explains why the government is doing whatever it is doing, and why difficult decisions have to be made. The latter would still be acceptable if the government executed in a competent fashion—like in the case of the nuclear deal—but intolerable where execution is poor.

In this case, there is no evidence that the relevant cabinet committees ever discussed the implications of RBI’s move and took the necessary measures to manage the fallout. The RBI’s independence doesn’t preclude coordination in matters like this. A competent government would have reassured the markets and the public that although RBI’s measures against imports from Iran would put 13% of India’s supply of crude at risk, it has alternative plans to protect the Indian economy. Instead we were left working out the implications of terse press releases issued by the central bank.

What might those alternative plans be? These could involve arrangements to import Iranian oil through other currencies (or the Indian rupee), assurances from other suppliers (read Saudi Arabia) that they will make up the shortfall or both. Given Saudi interests in keeping the lid on Iran’s nuclear programme, New Delhi could have extracted the latter as the price of tightening the financial screws on Iran. Indeed, not extracting such a price is a good opportunity squandered.

India must get its act together on Iran. First, it is in India’s interests to ensure that Iranian oil and gas continue to provide the economy with the supply diversity that an oil-importing country needs. If this objective is inconsistent with playing responsible global citizen then so be it.

Second, given that Iran shares an interest in preventing Afghanistan from falling under the sway of a Saudi-Pakistani-Taliban nexus, India needs to continue to engage Iran.

Third, while a nuclear-armed Iran may or may not be entirely in India’s interests, it is far better to manage the consequences thereof than to countenance the use of military force in a futile attempt to stop it.

Finally, while international sanctions are unlikely to prevent a determined Iran from developing a nuclear weapon, it is geopolitically costly to stay out of the Western consensus. Unless sanctions prohibit India from purchasing Iranian oil and gas, it is better for India to be part of the sanctions regime.

Reconciling these objectives is not easy, but not impossible either. The big prize in foreign policy, however, is for India to assiduously work to bridge the divide between the United States and Iran. This—more than securing a permanent seat at the UN Security Council—is a project that is worthy of a rising global power. This task of international statesmanship requires a real leadership at South Block and the PMO. Till that time we can have day-to-day issue management, not strategy.

The new year begins with a question mark on oil imports from Iran. The larger question mark though is whether the UPA government will now realise that it finds itself in a jam over Iran because it has no ideas of its own.

Even if it can be done, forcing foreign oil firms to not sell gasoline to Iran will hurt the US economy

Writing in the Wall Street Journal, Orde F Kittrie argues that the incoming Obama administration must exploit Iran’s “economic Achilles’ heel”—the fact that it has to import refined gasoline—to persuade it to negotiate over its nuclear programme. Since Iran imports gasoline from five firms “four of them European: the Swiss firm Vitol; the Swiss/Dutch firm Trafigura; the French firm Total; British Petroleum; and one Indian company, Reliance Industries”, he calls upon the Obama administration to insist that the Swiss, Dutch, French, British and Indian governments stop gasoline sales to Iran from their countries’ companies. (linkthanks Harsh Gupta)

In addition, he suggests that the US could act on its own:

Consider India’s Reliance Industries which, according to International Oil Daily, “reemerged as a major supplier of gasoline to Iran” in July after taking a break for several months. It “delivered three cargoes of gasoline totaling around 100,000 tons to Iran’s Mideast Gulf port of Bandar Abbas from its giant Jamnagar refinery in India’s western province of Gujarat.” Reliance reportedly “entered into a new arrangement with National Iranian Oil Co. (NIOC) under which it will supply around . . . three 35,000-ton cargoes a month, from its giant Jamnagar refinery.” One hundred thousand tons represents some 10% of Iran’s total monthly gasoline needs.

The Jamnagar refinery is heavily supported by U.S. taxpayer dollars. In May 2007, the U.S. Export-Import Bank, a government agency that assists in financing the export of U.S. goods and services, announced a $500 million loan guarantee to help finance expansion of the Jamnagar refinery. On Aug. 28, 2008, Ex-Im announced a new $400 million long-term loan guarantee for Reliance, including additional financing of work at the Jamnagar refinery. [WSJ]

It is unclear if Mr Kittrie is proposing that the US government purchase all that gasoline from Reliance at a premium over market prices, so as to deny the Iranians that gasoline. As for financing arrangements by the US Export-Import bank, what Mr Kittrie does not realise or forgets to mention, is that they exist because Reliance is purchasing goods and services from US suppliers. Withholding loan guarantees will be counterproductive to US commercial interests—for European and Japanese suppliers will be too keen to replace their American competitors, and their respective Ex-Im banks will supply the requisite loan guarantees. In any case, Reliance is unlikely to have too much of a difficulty in securing such guarantees, even in today’s financial markets.

Whatever the merits of the proposal to squeeze Iran through a policy of gasoline denial, Mr Kittrie’s proposal will hurt the US economy. Now, why would Mr Obama want to do that…when the US economy is already in the doldrums?

INI

The Acorn is a blog on the Indian National Interest, an initiative of The Takshashila Institution, an independent networked think tank on India's strategic affairs.
Takshashila—a non-partisan, non-profit public charitable trust—contributes towards building the intellectual foundations of an India that has global interests. It aims to establish itself as one of the most credible voices in India’s public policy discourse, known for its unambiguous pursuit of the national interest, through consistent high-quality policy advisories.